U.S. shows shale technology to the world; foreigners learn techniques, but have long way to go

Oil companies from China, Norway, Japan and other nations are investing billions of dollars in U.S. shale projects so they can learn how to extract oil and gas from bedrock and use those technologies to tap into the large and mostly undeveloped shale deposits outside the U.S.

China's Sinochem Group petrochemical company was the latest to buy into a partnership with American company Pioneer Natural Resources, paying $1.7 billion for a stake in the Wolfcamp shale play in West Texas. That January transaction is under review in Washington for compliance with national security laws.

About one-fifth of the more than $134 billion in U.S. shale investment since 2008 has come from joint ventures involving foreign companies hoping to tap into and learn from the U.S. shale boom, according to the U.S. Energy Information Administration.

China has a particular interest in acquiring shale drilling technologies because it possesses nearly one-fifth of the world's total estimated reserves of shale oil and gas, and it has barely begun to exploit those resources. China has grown increasingly dependent on imports of oil in the past decade and would like to use its own clean-burning gas to heat homes and fuel factories and power plants, but the emerging Asian giant lacks the expertise and other key assets needed to do so.

China's Sinopec and CNOOC Ltd. state oil companies have acquired stakes in Texas' Eagle Ford, Colorado's Niobrara and other U.S. shale projects since 2010.

CNOOC's U.S. partner, Oklahoma-based Chesapeake Energy Corp., is a pioneer in the shale industry that ran up big debts from drilling projects in recent years and welcomed the $2.6 billion infusion of cash from China. CNOOC Chairman Fu Chengyu, citing Chesapeake's leading role in shale development, predicted "substantial benefits to both parties" when he signed the deals.

Opposition in Congress killed CNOOC's highly publicized attempt to buy out American oil company Unocal Corp. in 2005, but the U.S. government quietly approved the CNOOC and Sinopec shale investments. Since 2009, the U.S. has had an agreement with China to share technology and cooperate in the development of shale oil and gas through joint ventures between U.S. and Chinese firms.

"China is a newcomer to the shale gas industry," said David Xu, an analyst at KPMG International. "Over time, it could become one of the world's largest producers" if it learns the technology and resolves numerous obstacles to development.

China's hurdles

China has the world's largest estimated reserves of shale gas, according to the U.S. energy agency, but they are not as easily accessible as the unconventional gas in the U.S. because of key geological differences.

Much of the Chinese gas lies in mountainous regions such as Sichuan that are riddled with fault lines. This month, one of the area's frequent earthquakes created major difficulties for drilling and transporting gas. Moreover, much of China's shale gas is buried twice as deep as the gas in the U.S. and may contain contaminants such as hydrogen sulfide, a gas that can be lethal.

"Techniques used in the U.S. may not be appropriate at these sites," said Mr. Xu, so even after learning through their joint ventures in the U.S., Chinese oil companies likely will have to develop techniques to tap into their own reserves. The Chinese firms are choosing U.S. partners with shale drilling experience in their attempts to make headway in China.

Another problem is that some of China's biggest shale deposits are in western regions where large amounts of water are not available for the water-intensive hydraulic fracturing drilling process used to free up oil and gas trapped in the bedrock. Shale developers in the Sichuan region in the center of China have plenty of water available, but they would have to compete with farmers for use of the water in a country where agriculture remains a primary occupation.

Another big difference is that much of the shale in China is mixed with clay — rather than brittle bedrock in the U.S. — which makes the fracking process more difficult, Mr. Xu said. Thus techniques learned in the U.S. likely would have to be modified to be applied in China.

On top of the multiple geological obstacles, China also has many legal and bureaucratic hurdles. Notably, the state controls the biggest oil companies as well as the price of natural gas, so there is little opportunity for the kind of innovation coming from small firms that pioneered U.S. shale development, and no guarantee that once developers go to the expense of extracting the oil and gas, they would be able to make a profit or even cover their costs.

"The lack of a national pricing structure is creating uncertainty among potential investors" in China's shale gas and has held up development, said Mr. Xu. Also, "Chinese restrictions on foreign investment could hamper growth" if Chinese firms are unable to innovate their way around the problems and need assistance from foreign investors.

He predicted that it will take "an extended period of time" to overcome the obstacles and bring China's shale gas to market.

The London think tank GlobalData also has concluded that China's plans to develop its shale are overly ambitious, given the many obstacles.

"Water shortages are a major issue in China," it said in a report, while "Chinese shale gas companies cannot currently use the high performing drilling technologies used to extract shale gas in the U.S." and will need further research to adapt U.S. drilling methods to China's geology.

Keeping up with the U.S.

The United Kingdom, France and Norway also are tapping into the U.S. shale revolution with the goal of transferring the technologies to Europe and the rest of the world.

Norway's Statoil ASA, Europe's second-largest natural gas producer, and British Gas have teamed up with Chesapeake to develop Pennsylvania's Marcellus Shale. Britain and Norway have considerable oil and gas resources, although their conventional reserves are depleting quickly.

Chesapeake co-founder Aubrey McClendon had high hopes of "exporting our world-class unconventional natural gas technology" when he signed the $3.8 billion deal with Statoil in 2008, but prospects for developing sizable shale deposits in Europe have dimmed since then.

Environmental opposition to shale development is much stronger in Europe than in the U.S., with worries about groundwater contamination and other side effects. Several countries — including France and the Netherlands, which have some of the most promising shale fields — have banned fracking.

Poland has been eager to develop alternatives to imports of Russian natural gas, but has had less success than the U.S. at developing shale reserves.

For countries that are open to shale development, getting some schooling through involvement with U.S. projects appears to be an important prerequisite. In all, foreign oil firms have invested more than $28 billion in U.S. shale projects since 2008, often paying dearly to become passive partners whose main function is to provide the cash needed to cover a share of the drilling costs.

"While foreign companies may pay sizable initial costs through joint ventures, these deals can be considered a cost of entry to the development of hydrocarbons through the latest technology," said Aloulou Fawzi, shale analyst at the U.S. energy agency. For China in particular, "this is an opportunity for them to transfer this technology and to have a partner who has the skills to help them catch up."

Consumers of natural gas also want some of the action. Japanese companies such as Mitsui & Co. Ltd., Sumitomo Corp. and Marubeni Corp. have been the largest foreign investors in U.S. shale drilling, putting more than $5 billion into a range of projects.

Mr. Fawzi said Japan, which lacks resources of its own, is seeking to replace its nuclear power plants after the Fukushima disaster with other fuels. It may be in the game partly to position Japan favorably as it seeks to become the largest importer of shale gas from the U.S.

Despite much foreign interest in the U.S. boom and large estimated shale resources on other continents from Australia to Argentina, analysts say, the lags in technical know-how overseas, differences in geology and less drilling-friendly governmental regimes mean that shale development overseas will take a lot more time than it has in the U.S.

"This is mainly a U.S. story" right now, said investment analyst Andrew Busch, noting that Exxon Mobil Corp. last year pulled out of once-promising exploration projects in Poland while Chevron Corp. has said commercial production in Europe is unlikely to get started this decade because of strong environmental opposition.

"The U.S. has leapt forward on the development of shale due to the rapid deployment of new technology, due to the country having been extensively geologically mapped out, and due to the foresight of states like North Dakota not to overtax or overregulate the fledgling industry," he said. This is proving to be "a major advantage to the United States."